BoE Stay Pat On QE, Rates

8/2/2012 7:38 AM ET

The Bank of England kept its policy unchanged on Thursday despite the economy slipping deeper into recession. Apparently, the no action reflects a wait-and-watch approach till the stimulus measures initiated last month feed through and take effect.

The nine-member Monetary Policy Committee maintained the asset purchase programme at GBP 375 billion and the key interest rate at a historic low of 0.50 percent.

Policymakers wait to assess the impact of the GBP 50 billion increase in quantitative easing as well as the new 'Funding for Lending Scheme', initiated in early July, on the economy and lending situation. The minutes of the meeting is due on August 15.

At the July MPC meeting, Spencer Dale and Ben Broadbent voted to retain the size of QE at GBP 325 billion, while the other seven members including Mervyn King sought a GBP 50 billion increase to kick start the ailing economy.

The MPC said today it expects the asset purchase programme to take another three months to complete. The scale of the programme will be kept under review, the bank said.

The central bank is likely to downgrade its growth outlook, when it releases the next quarterly Inflation Report on August 8, triggering expectations for more action further ahead.

Early July, the government and BoE together introduced a Funding for Lending scheme to provide funds to households and firms at lower rates.

In the second quarter, the economy shrank at the fastest pace since the beginning of 2009 and is currently reeling under a double-dip recession.

Gross domestic product was down 0.7 percent from the first quarter. Meanwhile, some improvement could be expected in the current quarter, as the Olympics game is set to temporarily boost economic activity.

Recently, the International Monetary Fund slashed its U.K. GDP forecast for 2012 to 0.2 percent from 0.8 percent and also reduced its 2013 outlook to 1.4 percent from 2 percent.

Adding to the woes, the Purchasing Managers' survey showed that the British manufacturing sector contracted in July at the biggest rate since March 2009 on substantial declines in output and new orders.

The minutes of the July meeting suggested that policymakers are prepared to re-visit the case for lowering interest rates at a later stage. The current inflationary situation also reasonably support this stance.

The U.K. interest rate currently stands at the lowest level since the bank was established in 1694. The rate has been maintained at the current 0.50 percent since March 2009.

Inflation has continued to ease in the U.K. on easing fuel prices amid slowing economic activity. Inflation fell to 2.4 percent in June, the lowest since November 2009. The central bank estimates the inflation rate to be around 1.6 percent in two years time.